Tuesday, 6 September 2011

NEW YORK (MarketWatch) — Does gold’s bounce-back vindicate the bugs? They say yes!

At the CME floor close on Friday, the December gold contact GC1Z+1.89% was up $47.80 or 2.53% on the day, and $79.60 or 4.3% on the week. It had broken out of a sideways pattern which had held since early Tuesday morning and was $170.80 or 10% higher than the low seen during the previous week’s dramatic sell-off.

And gold went higher in electronic aftermarket on Friday afternoon. On a weekly settlement basis, this close was a record.

However, this is less impressive than it sounds. There has been little advance from the previous phase of strength in early April, although gold itself is 30% higher. What happened to the famed leverage of gold shares?

Still, long time followers of gold are feeling pretty cheerful. Indeed, the normally understated Australian commentator who edits The Privateer was positively triumphant this weekend: “The gold price is almost all the way up to the top of its bull-market channel again. If it keeps going up from here and breaches that channel (goes above it), then there is absolutely no telling how high it could go.”

Privateer added, characteristically: “Of course, the powers that be know that. They will not ‘let it go’ without a fight. Another and bigger margin hike by the CME is possible, indeed it is likely. Don’t forget, it took at least four margin hikes to stall silver short of the $50 level at the end of April.”

“But in the larger scheme of things, all that is irrelevant. It is achingly obvious that gold is now the premier CURRENCY in the world as far as the global markets are concerned. Not even the Swiss franc can keep up with it.”

Part of the reason for this confidence: It is now very well known that the fourth quarter is the season of high demand from the major gold-consuming markets, particularly India.

The ever-informative Edel Tully at UBS noted on Friday morning: “Our historical physical sales to India ... data for the last three years shows that demand typically accelerates in the last four and five months of the year, with Q4 volumes between 150% and 65% higher than Q1 and Q2 respective levels.”

With gold shares lagging the metal so much, and for so many weeks, there is an obvious possibility of a dramatic catch-up play, even if gold merely sustains these levels.

That is why this week’s gold-share action was so delightedly scrutinized by several observers.

The author of Trader Dan’s Market Views was emphatic on Friday: “Note that the HUI has smashed, and I do mean ‘smashed’ through overhead resistance near 610 and is charging higher. … I do find it very telling that the mining sector shattered upside chart resistance on a day in which the broader stock markets are cratering.”

Over at JSMineSet, veteran gold hand Jim Sinclair the previous evening endorsed a bullish but complex gold-share chart study by one of his contributors, saying he was “... spot on. There is a quiet but definitive technical turn taking place in the group.”

Long-term chartist Martin Pring had the same thought in his Monthly, published this weekend: “The Gold Miners ETF, the GDX, has been lagging the metal quite badly. However, it looks as though it may be in the process of breaking to the upside. …The relative action of the GDX against the S&P500 Index SPX-2.53% also looks to be positive.”